TACKLING OFFSHORE TAX EVASION: STRENGTHENING CIVIL DETERRENTS Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to respond to the [HMRC] consultation document ( the Consultation ) issued on [date]. 1.2 We note that the Consultation is intended to explore the design of tailored sanctions to more effectively deter tax non-compliance linked to income and gains arising and assets held offshore. We also note that it is taking place during stages 1 and 2 of the process and that its purpose is to seek views on the detailed policy design, any suitable possible alternatives and a framework for implementation of a specific proposal. 1.3 In section 2 of this response, we highlight some general matters which we regard as significant before responding in section 3 to the specific questions posed by the Consultation. 2 General matters of significance 2.1 Paragraph 1.7 of the Consultation states: Opportunities are available to disclose unpaid tax liabilities on the most favourable terms available under the law. Whilst many practitioners are aware of the possibility of making a disclosure under the Liechtenstein Disclosure Facility (LDF) or the facilities available in respect of the British Crown dependencies (Guernsey, Isle of Man and Jersey), the circumstances when such a facility can be used are limited. The general public is much less aware of these opportunities. We appreciate that there have been various disclosure facilities that were specifically designed to encourage voluntary disclosure of offshore income and gains. Nevertheless, we think that the proposed introduction of tougher penalties provides an excellent opportunity for HMRC to encourage last chance voluntary disclosures under a general and well publicised offshore disclosure facility. For HMRC, this could provide the opportunity to bring in significant additional revenue with a minimal commitment of HMRC resources. For the Registered in England and Wales Registered Office: 1st Floor, Artillery House, 11-19 Artillery Row, London SW1P 1RT A company limited by guarantee: Number 2418331 Registered as a charity: Number 803480 VAT Registration: Number 497539090
relevant taxpayers, there would be a strong incentive to clean up their tax affairs before the introduction of the strengthened regime. Given the wide variety of circumstances and undisclosed liabilities that taxpayers might wish to report in advance of tougher penalties (and the very beneficial impact that this might have on tax revenues), we think that any such general disclosure facility should include: an appropriately resourced helpline; clear guidance on how and who to contact in order to make a voluntary disclosure; and an opportunity for correspondence between taxpayers (or their agents) and HMRC in advance of the formal disclosure. [Specific disclosure facilities operated to date have been on a do-it-yourself basis and left it very much to the taxpayer to get things right in their formal disclosure. That does not seem to be consistent with HMRC s Your Charter commitment to Help and support you to get things right.] 2.2 In the application of the offshore penalty regime to the non-disclosure of an estate s Inheritance Tax liabilities, it will be essential to recognise that the personal representatives (or others providing information about the deceased s assets and liabilities) must be able to discharge their obligation to use reasonable care without having to make enquiries about the possible existence of unknown unknowns. 3 Response to the Consultation Questions Our comments in this section 3 follow the numbering of the Consultation questions so that section 3.1 is in answer to question 1 and so on. 3.1 Question One Do you consider it appropriate to extend the offshore penalties regime in the case of offshore assets which are part of the death estate and liable to IHT? If you do not, please say why. 3.1.1 In principle, we agree that it is appropriate to extend the offshore penalty regime to offshore assets which are part of a death estate and are liable to IHT. We do, however, consider that the various special features of estate administration and IHT in general will require special consideration in the application of the offshore penalty regime. 3.1.2 It will be particularly important to avoid any suggestion that the past behaviour of the deceased can in any way impact on how the behaviour of those responsible for the preparation and submission of the IHT return (or the provision of information that was required for the purpose) is viewed. Their responsibility only starts from the date of death and it is only from that date that their behaviour is relevant. P/ATTTSG/Submissions/2014 2
3.1.3 In applying the principles of reasonable care and reasonable excuse to the actions or inactions of those responsible for establishing the estate assets and liabilities, it is essential that HMRC appreciates the problems faced by the personal representatives. In the absence of the deceased (the one person who could be expected to have had the greatest understanding of what their estate comprised), the personal representatives have a daunting task. They must for example be able to fulfil their reasonable care obligation without committing an undue amount of time and expense to determining whether there might possibly be additional assets (whether within the UK or offshore) in respect of which they have no reason to have any knowledge. Their obligation to make reasonable enquiries is qualitatively different from that of someone making a return in respect of their own tax affairs. 3.2 Question Two Do you consider it appropriate to extend the offshore penalties regime in the case of transfers of assets into offshore structures which give rise to IHT? If you do not, please say why. 3.2.1 In principle, we agree that it is appropriate to extend the offshore penalty regime to transfers of assets into offshore structures which give rise to IHT. It will, however, be very important to ensure (as indicated in paragraph 2.21 of the Consultation) that penalties would only apply to accountable persons who had not taken reasonable care in the preparation of the IHT account. It is essential that one person s failure to take reasonable care (for example the settlor) cannot affect the liability of any other person (for example a beneficiary) to penalties. 3.2.2 We think that special consideration may be needed to the situation where a person other than someone who had an obligation to submit an account (or to provide information to enable another to) nevertheless has a statutory obligation to pay the IHT in question. It is essential that such a secondary payer of the IHT itself has no obligation to pay any penalty that arises in respect of that IHT liability because of the conduct of another person. We have assumed that the existing legislation provides this protection for the secondary payer but have been unable to find specific authority on the point. We therefore highlight the point in case statutory clarification is required. 3.3 Question Three Do you agree that offshore penalties for IHT should be calculated using the same classification for territories as applies for IT and CGT? If you do not, what factors should a new classification take into account and why? 3.3.1 For reasons of simplicity and consistency, we think there is a strong case for using the same classification of territories as for income tax and CGT. 3.4 Question Four Do you agree with our view about the location of assets in relation to a death event? If you do not, what could constitute a better approach? 3.4.1 On the assumption that the location of assets in relation to a death event would be determined in accordance with the general IHT rules in respect of the situs of assets, we agree that this should be the relevant location for determining any penalty. P/ATTTSG/Submissions/2014 3
3.5 Question Five Do you agree with our view about the location of assets in relation to transfers of value? If you do not, what could constitute a better approach? 3.5.1 Paragraph 2.27 of the Consultation indicates that the penalty could be based upon either the initial or the final location of the assets before expressing a preference for basing the penalty on the destination of the assets. There is some ambiguity in that second phrase and we are uncertain whether it refers to the initial or the final destination. Consistent with the proposal in Chapter 3 of the Consultation to introduce additional sanctions on taxpayers who deliberately move assets to continue evading tax, we are taking HMRC s preference to be for basing the penalty relating to the transfer of value on the initial destination at that time. Given that the penalty regime is founded on a consideration of behaviour, we think that it is logical to determine the penalty attributable to the transfer by reference to the factual destination of that transfer. Any subsequent movement of the asset would then be subject to any appropriate additional sanction under the Chapter 3 proposals. This would have the sensible result of fixing the penalty by reference to the actual action of the taxpayer and leaving the possibility of further sanctions if they then took action that increased the prospect of the non-disclosure remaining undiscovered. 3.5.2 One possible exception to the penalty being determined by reference to the initial destination would be where the initial destination was demonstrably transitory for example where the onward movement occurred very shortly after arrival at the initial destination or where arrangements were already in place for the onward movement at the time of the initial transfer. 3.6 Question Six Do you accept the principle that penalties should be strengthened to take account of where the proceeds of evasion are hidden? If you do not, please say why. 3.6.1 We note that case studies 6 and 7 on page 16 of the Consultation both refer to the taxpayer as having taken calculated steps to hide evidence of his evasion. Only case study 6 refers to penalties of up to 100% being charged but both examples appear to assume that the act of channelling receipts from a UK business to a foreign bank account is of itself a deliberate and concealed action (thereby exposing the taxpayer to a domestic penalty of up to 100%). Looked at in terms of the behaviour of the taxpayer, we question whether the action should be treated in that way. Their actual action was channelling funds to a separate account in the hope that the income in question would escape detection and thus taxation. They may or may not have appreciated that their choice of territory for the account might make it more difficult for HMRC to detect its existence than if they had retained the funds in some undisclosed form in the UK. If they had given no thought to HMRC s ability to discover overseas bank accounts, their action would in behavioural terms have been no different from banking the money into an undisclosed UK bank account. 3.6.2 We note that the examples of deliberate and concealed inaccuracy given in paragraph CH81160 of HMRC s Compliance Handbook include systematically diverting takings into undisclosed bank accounts and covering the traces (emphasis supplied). That seems to suggest that the act of diverting takings to an undisclosed bank account is not of itself an act of concealment. There has P/ATTTSG/Submissions/2014 4
to be an added ingredient the covering of traces. This prompts the question whether the taxpayer s decision (in each of the case studies) to use an offshore bank account instead of a UK account did involve the covering of traces. If it did, it means that there is already a penalty premium attaching to the use of an offshore account. If that is the case, introducing a greater penalty by reference to where the proceeds of evasion were hidden would introduce an element of double counting firstly by characterising the action (the use of an overseas account) as involving concealment and secondly by imposing an offshore penalty premium. If the use of an offshore account already attracts a premium penalty, does the sanction actually need strengthening? We think that this point requires further consideration. We think that a tribunal might be reluctant to uphold a level of penalty that involved such double-counting. 3.6.3 We note in relation to point 3.6.2 above that all the other examples of deliberate and concealed action in CH81160 involve a significantly more deliberate act of concealment. All come close to if not actually involving fraud. The mere use of an offshore account of itself does not have that quality. We think that explains why the inclusion of the systematic diversion of takings into undisclosed bank accounts as an example of deliberate and concealed inaccuracy is specifically qualified by the phrase and covering the traces. 3.7 Question Seven Do you agree that the extension of offshore penalties should apply to cover all inaccuracies arising and failures relating to category 1 or category 2 territories where the proceeds of that noncompliance are hidden in higher category territories? If you do not, please say why. 3.7.1 In principle, the imposition of a premium penalty where the proceeds of non-compliance are hidden in higher category territories is consistent with the objectives of the Consultation. However, consideration must be given to the potential double-counting issue highlighted in section 3.6 above. If the involvement of a higher category territory automatically introduces a premium penalty, it should not also be a relevant factor in considering whether the noncompliance involved concealment. 3.8 Question Eight Do you favour the introduction of such a statutory rule? How else might the link between non-compli 3.8.1 We agree that the introduction of a statutory presumption might be appropriate provided that the presumption was rebuttable. That would put the onus on the taxpayer to displace the presumption on the balance of probabilities. 3.9 Question Nine Which of the above two methods for ascertaining the category/ level of penalty do you consider to be the best way of applying the extension to offshore penalties? Please say why. 3.9.1 We see the second possible method (as set out in paragraphs 2.51 and 2.52 of the Consultation) as producing the result that is most logical, most fair and most consistent with existing legislation. P/ATTTSG/Submissions/2014 5
3.9.2 The first method (as set out in paragraphs 2.47 to 2.50 of the Consultation) has the potential to produce arbitrary, unfair and illogical outcomes. 3.9.3 We note that paragraph 2.50 of the Consultation refers to the jurisdiction in which the largest part of the proceeds of non-compliance can be found. By contrast, example 3 on page 20 considers where the proceeds of non-compliance were banked. The difference between the two may be unintentional but we observe that the approach in example 3 (applying the second possible method) creates greater certainty as it ignores what subsequent movements there might have been on the account prior to it being found. (Additional sanctions in respect of movement to higher category territories would be picked up under the Chapter 3 proposals). 3.10 Question Ten Do you agree that current safeguards would be sufficient? If you do not, in what way would they be inadequate and how should they be amended? 3.10.1 Yes, subject to our concern about the double-counting issue (please see sections 3.6 and 3.7 above) being adequately addressed. 3.11 Do you agree that there should be strengthened sanctions for those who deliberately move assets with the intention of continuing to evade tax? If you do not, please say why. 3.11.1 In principle, the imposition of additional sanctions on those who move assets with the intention of continuing to evade tax is consistent with the objectives of the Consultation. However, we identify two issues that require consideration. 3.11.2 Paragraph 3.3 of the Consultation refers to the deliberate moving of funds being a factor to be taken into account in determining the taxpayer s behaviour. If the fact of subsequent movement were to attract an additional sanction, that would make it inappropriate to also factor that movement into the characterisation of the taxpayer s original non-compliance. There would otherwise be a double-counting problem. 3.11.3 We note from paragraph 3.6 of the Consultation that the proposed measures would only apply where the assets in question are the proceeds of deliberate non-compliance and the movement is in response to the increased transparency of the jurisdiction from which the assets are moved. Paragraph 3.7 then indicates that the measures would not penalise genuine investment or business activity and that HMRC would be required to demonstrate that the movement was with the intention of avoiding greater tax transparency. We offer the following comments: 3.11.3.1. Unless a taxpayer had been unwise enough to document why they were moving the asset, it is difficult to see what convincing evidence HMRC could produce in support of their assertion concerning the intention; 3.11.3.2. In addition to genuine investment and business activity reasons that a taxpayer could offer in support of a non-tax motive for the asset movement, we anticipate that taxpayers might advance personal and family reasons for a movement of an asset such as: Extended family still live in the jurisdiction; P/ATTTSG/Submissions/2014 6
Taxpayer has a home in that jurisdiction; A matrimonial or sibling dispute; Objective was to keep the asset out of the hands of creditors (other than HMRC). 3.12 Question Twelve Do you consider that option 3 meets the policy objectives set out above? If you do not, please say why. 3.12.1 Without further detail as to how a new penal surcharge might operate and the rates of that surcharge, it is difficult to assess whether it would meet the policy objective. 3.12.2 We are uncertain that the surcharge would always encourage earlier voluntary disclosure. Once significant surcharges had been incurred, there would be a reduced incentive to disclose a situation involving offshore non-compliance. 3.12.3 We think that consideration should be given to how liability to a surcharge might be mitigated by voluntary disclosure making it more of a carrot than a stick. 3.12.4 Please also see our response in section 3.16 below. 3.13 Question Thirteen Do you consider that option 4 meets the policy objectives set out above? If you do not, please say why. 3.13.1 We do not consider that extending the assessing time limits would prove workable. Amongst other things: 3.13.1.1. It would be very difficult to reconstruct events of the distant past often without the benefit of bank statements and similar documentation; 3.13.1.2. Having different assessing time limits for domestic and offshore non-compliance would be confusing and could involve HMRC committing resources to detailed research which produced no additional revenue; 3.13.1.3. There would be an increased risk that other parties to relevant transactions were no longer available to give evidence; 3.13.1.4. Life expectancy in the UK would currently mean that someone who was now aged thirty could be assessed in respect of what they did today when they were in their late seventies. 3.13.2 Please also see our response in section 3.16 below. 3.14 Question Fourteen Do you consider that option 5 meets the policy objectives set out above? If you do not, please say why. P/ATTTSG/Submissions/2014 7
3.14.1 Without further detail as to how the penalty increment would work or at what rate it would be set, it is difficult to assess whether this Option 5 would meet the policy objective. 3.14.2 In principle, we can see some merit in the proposal as applied in paragraph 3.18 of the Consultation. It introduces a sanction aimed at discouraging movement of assets to more opaque jurisdictions but without imposing hindsight on historic actions. The sanction would only apply to actions taken after the introduction of the proposals. 3.14.3 We are instinctively less comfortable with the alternative proposal in paragraph 3.19 of the Consultation as that appears to result in penalties being calculated with the benefit of hindsight. That appears to involve an element of retrospective legislation (or a long delay pending implementation) and has the added disadvantage of introducing an increasing disincentive to making a voluntary disclosure. 3.14.4 Please also see our response in section 3.16 below. 3.15 Question Fifteen Do you have a preferred calculation method for option 5? If you do, please say which one and why. 3.15.1 We prefer the first calculation method (paragraph 3.18 of the Consultation) for the reasons given in in section 3.14 above. 3.16 Do you have a preference between options 3, 4 and 5? If you do, please say why. 3.16.1 Without more information as to how the three options might operate, it is impossible to answer this question with any confidence or to provide supporting reasons. 3.16.2 Instinctively, we would rank our preferences in the following order: Preferred Option 5 (first method paragraph 3.18) Next - Option 3 Least favoured Option 4. 3.16.3 Whichever option is chosen, it is essential that any additional sanction to discourage the movement of assets to more opaque jurisdictions is practical, predictable and proportionate. It must be: simple for taxpayers and their agents to understand and for HMRC to enforce; clear when and where it applies so that the sanction cannot be incurred accidentally; a proportionate and appropriate response to the risk to the Exchequer. 3.16.4 We think that it would be appropriate to consult specifically on the design of the additional sanction in order to ensure that it meets the above criteria. 3.17 Question Seventeen Do you agree that current safeguards would be sufficient? If you do not, in what way would they be inadequate and how could they be amended? P/ATTTSG/Submissions/2014 8
3.17.1 We note that the motive test set out in paragraph 3.6 of the Consultation (the intention of continuing to hide the assets) appears to be a common feature of all three options. We see that as an essential additional safeguard (albeit that we have questioned whether it would always be possible for HMRC to prove the intention of the taxpayer). 3.17.2 Not so much in terms of a safeguard but more in terms of helping the proposals achieve their objectives, we think that serious consideration is needed as to their interface with reduction of penalties for disclosure. 3.17.3 We have already identified the need to avoid double-counting (please see sections 3.6.2, 3.7.1 and 3.11.2 above). 3.18 Question Eighteen Do you consider it appropriate to update the offshore penalties regime to reflect the new global standard? If you do not, please say why. 3.18.1 Yes. That seems appropriate. 3.19 Question Nineteen Recognising the step change in automatic exchange of information standards, which method do you consider better achieves the policy objectives set out above and please say why? 3.19.1 We think that the first option (paragraph 4.9 of the Consultation) better achieves the policy objectives. Setting maximum penalties above 200% could be a very significant disincentive to disclosure and could also raise issues of proportionality. There must come a point where the taxpayer is unable to contemplate dealing with the situation either from a mental or monetary point of view. The 200% penalty would in any case be subject to incremental adjustment under Option 5 (paragraphs 3.16 to 3.21 of the Consultation). 3.20 Question Twenty Do you agree that current safeguards would be sufficient? If you do not, in what way would they be inadequate and how could they be amended? 3.20.1 We have already identified the need to avoid double-counting (please see sections 3.6.2, 3.7.1 and 3.11.2 above). 3.21 Do you have any views, comments or evidence which may help inform our understanding of likely impacts? 3.21.1 Please see our response to Question 22 below. 3.22 Do you have any views, comments or evidence which may help inform our understanding of likely equalities impacts? 3.22.1 We have referred in section 3.11.3.2 above to possible non-tax motives for the movement of funds. Special consideration may arise in respect of taxpayers with historical and/or family P/ATTTSG/Submissions/2014 9
connections with other jurisdictions. It is essential that the new provisions are applied with appropriate consideration for such factors. 4 Summary 4.1 We have responded to all the Consultation questions. Their detailed and varied nature makes summary of our answers inappropriate. 4.2 In section 2 of this response, we have highlighted what we consider to be the compelling case for a last chance well publicised and general disclosure facility in advance of the introduction of the strengthened penalty regime. We see this as bringing one of two beneficial outcomes for HMRC. Either previously non-compliant taxpayers will take the opportunity to make voluntary disclosures thereby increasing revenue to the Exchequer with minimal commitment of resources by HMRC or they will choose to remain non-compliant despite the opportunity in which case HMRC will have a stronger case to contend that the behaviour of the taxpayers in question was deliberate rather than simply careless. 4.3 Also in section 2, we have highlighted the need for the application of the strengthened penalty regime to recognise the particular situation of personal representatives and others in relation to ascertaining the assets of a deceased s estate. 4.4 In section 3.16, we have strongly recommended further consultation on the design of the additional sanction for moving assets to more opaque jurisdictions and emphasised the need for any such sanction to be practical, predictable and proportionate. 4.5 We would be pleased to join in any discussion with HMRC in relation to these very fundamental proposals. Should you wish to discuss any aspect of this response, please contact our relevant Technical Officer, Will Silsby, on 01905 612098 or at: wsilsby@att.org.uk. Yours sincerely Paul Hill Chairman, ATT Technical Committee 5 Note 5.1 The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration P/ATTTSG/Submissions/2014 10
and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible. Our members are qualified by examination and practical experience. They commit to the highest standards of professional conduct and ensure that their tax knowledge is constantly kept up to date. Members may be found in private practice, commerce and industry, government and academia. The Association has over 7,500 members and Fellows together with over 5,000 students. Members and Fellows use the practising title of 'Taxation Technician' or Taxation Technician (Fellow) and the designatory letters 'ATT' and 'ATT (Fellow)' respectively. P/ATTTSG/Submissions/2014 11